The party last weekend had the usual mix. Good food, louder music than anyone needed, and at least three separate conversations about fantasy football happening within earshot of me at any given moment. Football is my sport. I have followed it my whole life, and most of my friends know better than to bring up baseball around me unless they want a long answer.
One friend brought it up anyway. He lives and breathes baseball the way I live and breathe football, and he had a question that had clearly been sitting with him for a while. As he approached me, he obviously knows what I do for a living, so instead of asking me about a trade rumor or a pitching matchup, he asked me something completely different. He wanted to know why the Los Angeles Dodgers structured Shohei Ohtani’s contract the way they did.
I gave him the answer most people give. The deal helps the team’s luxury tax number. He nodded along, but I could tell that was not the part bothering him. Then he asked the real question, the one that had actually been on his mind the whole time. Why would Ohtani agree to make just $2 million a year on purpose?
That question followed me home from the party. It sent me down a research hole for the rest of the weekend, and what I found had almost nothing to do with baseball. It had everything to do with a strategy I build into client plans on a regular basis, just usually with a lot fewer zeros attached.
The Ultimate Contract Strategy
Shohei Ohtani signed a $700 million contract. He gets paid $2 million a year.
That gap should stop you cold. A ten year, $700 million deal works out to $70 million a year on paper. Yet Ohtani’s actual paycheck from the Los Angeles Dodgers this season is $2 million, according to reporting on the deal’s structure. The other $68 million a year does not vanish. It waits.
I have spent years telling business owners that timing is the most underrated lever in tax planning. Ohtani’s contract is the clearest example of that idea I have seen in professional sports. It also happens to be a near perfect blueprint for a strategy available to plenty of business owners reading this, minus the nine zeros.
The Contract That Broke Baseball’s Brain
Here is the basic structure. Ohtani deferred $68 million of his $70 million annual salary every year from 2024 through 2033. He collects $2 million a year while playing. Starting in 2034, the Dodgers pay him $68 million a year, without interest, through 2043.
The baseball reason for this gets discussed constantly. Major League Baseball uses a luxury tax system called the Competitive Balance Tax, and deferred money counts less against that tax than money paid today. Because of the deferral, Ohtani’s contract counts as roughly $46 million a year against the Dodgers’ payroll instead of $70 million. That flexibility let the team sign other stars around him.
I respect that reasoning. However, it is not the part of this deal that interests me most. The tax mechanics sitting underneath the baseball strategy are the real story, and they apply far beyond a pitcher’s mound.
Two Million Dollars Is Not the Real Number
California taxes high earners hard. The state’s top marginal rate sits at 13.3% in 2026, a combination of the 12.3% top bracket and an additional 1% surcharge on income above $1 million. Add the federal top rate of 37%, and a California resident at Ohtani’s income level faces a combined marginal rate north of 50%.
Now watch what the deferral does. While Ohtani plays for the Dodgers, he is a California resident, so his $2 million salary gets taxed at California rates. But the $680 million arriving from 2034 to 2043 gets taxed based on wherever he lives when he receives it. If he is not a California resident at that point, California does not get a bite of that income.
That single fact could save roughly $90 million, based on the math several tax analysts have run on the deal. Ohtani did not take a pay cut. He took a pay delay, and delay is one of the most underrated words in tax planning.
I want to pause here because this next part matters. This is not a loophole. It is not aggressive. It is a completely legal application of how states tax income based on residency at the time compensation is received, not when it is earned.
This Trick Has a Name
What Ohtani did has a formal name in the tax code. It is called nonqualified deferred compensation, and it operates under Internal Revenue Code Section 409A. The rule governs any arrangement where an employee earns compensation in one year but agrees, in writing and in advance, to receive it in a later year.
Executives use these arrangements constantly. A business owner who sells their company might structure part of the proceeds as deferred compensation instead of a lump sum. A physician joining a large practice might defer a signing bonus until retirement, when their income, and often their tax bracket, will be lower.
The IRS takes these plans seriously enough to publish a dedicated guide for auditors, officially called the Nonqualified Deferred Compensation Audit Techniques Guide. That alone should tell you this strategy carries real weight, and real scrutiny, when it is done correctly.
Why Business Owners Should Care About a Baseball Contract
You are probably not negotiating a $700 million deal. Still, the underlying principle applies directly to decisions many of my clients face every year. Timing income to land in a lower tax year, or a lower tax state, is one of the most powerful tools available to a business owner.
Consider a client selling their business for a large gain. Instead of taking the full purchase price in year one, an installment sale spreads that income across future years. If those future years land in a state with no income tax, or simply in years with lower overall income, the tax savings can be significant.
Consider retirement account timing next. A business owner nearing retirement often has more control over the year they recognize income than a typical W-2 employee. Choosing which year to take a large distribution, and where you are living when you take it, changes the math substantially. I covered how business owners retire differently from employees in an earlier piece, and this deferral concept sits right at the center of that difference.
Finally, consider state residency itself. Plenty of my clients have moved from California to Florida or Texas specifically around a major liquidity event. I wrote about that exact comparison in detail, because the difference between a 13.3% top rate and a 0% top rate is not a rounding error. It is often the single largest planning decision available to a business owner in a given year.
The Rule That Makes or Breaks This Strategy
Here is where I have to be the tax strategist instead of the hype man. Section 409A is unforgiving if you get it wrong.
The election to defer compensation generally has to happen before the year the income is earned, not after. If a plan fails to meet the technical requirements, the consequences are brutal. The deferred amount becomes immediately taxable, plus the IRS adds a 20% penalty tax on top of regular income tax, plus interest.
Ohtani’s deal worked because an army of agents, lawyers, and tax advisors built it correctly from the start. A business owner trying to defer compensation informally, without a proper written plan and a timely election, is not doing sophisticated tax planning. They are building a very expensive mistake with a delay button attached.
This is exactly why I tell clients that deferred compensation strategies need to be documented before the money is earned, not after someone already has a good year and wants to retroactively soften the blow. The IRS does not allow do overs here.
What This Contract Does Not Explain
Everything above covers Ohtani’s side of the ledger. It explains why a player would agree to $2 million now in exchange for $680 million later. It does not explain why a team would want to structure a deal this way in the first place, beyond the luxury tax benefit already mentioned.
That question opens up a completely different tax conversation, one involving how team owners treat a franchise purchase on their own returns, and why sports team ownership has become one of the most tax advantaged investments available to the ultra wealthy. That is Part 2, and it is a story that will change how you look at every headline about a billion dollar team sale.
For now, the lesson from Ohtani’s side of the deal stands on its own. Timing is not a side detail in tax strategy. It is very often the whole strategy.
The next time you see a contract that seems to defy logic on the surface, look for the tax reasoning hiding underneath it, because it is usually there.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
